Letter from Silicon Valley

The Money Shot

The sale of Instagram to Facebook for a cool billion in the spring of 2012 was the ultimate Silicon Valley fairy tale: 18 months from launch to offer. But, for co-founder and C.E.O. Kevin Systrom, it was more of a roller-coaster ride, with several missed opportunities, at least two “aha” moments, and one major reboot.

There’s no picture of the moment when everything changed for Kevin Systrom. But if there were, it would look something like this: A lanky, very tall, dark-haired man in his late 20s sits on a bench at the Caltrain commuter station in Palo Alto, California. A sepia tone and weathered patina might underscore the mood of weighty contemplation.

It was early April of last year, and Systrom was waiting for his business partner, Mike Krieger, to arrive from San Francisco. Systrom had just left Mark Zuckerberg’s nearby house and was still digesting the offer that the Facebook founder and C.E.O. had made him: to buy Instagram, the photo-sharing app that Systrom and Krieger had launched just 18 months before. The price Zuckerberg offered was $1 billion—$300 million in cash and the rest in Facebook stock, an especially generous-seeming deal, on the eve of his company’s much-anticipated initial public offering.

The offer was even more impressive given Instagram’s size and age. At the time, it had just 13 employees, operating out of a cramped space in the South Park section of San Francisco. Still, the small crew had managed to attract 30 million iPhone users in just a year and a half by offering a service that allowed a person to quickly upload, prettify through the use of filters, and publish images to the Web for friends to see. A version for Google’s Android mobile operating system had launched the week before, gaining another million users in a single day. What’s more, although the app generated no revenue, it had attracted so much attention from venture capitalists that the start-up had nearly closed an impressive new round of funding at a wildly high valuation of $500 million. Zuckerberg had just doubled that, leaving Systrom with a lot to think about on that train-station bench.

Click. If there ever was a money shot to take for Instagram and Systrom, that was it.

Starting Up

In many ways, life has always been a bit charmed for Systrom, who grew up in the upper-middle-class Boston suburb of Holliston, Massachusetts. Such towns are full of smart, ambitious parents raising smart, ambitious children.

And so it was with Systrom. After high school at the nearby Middlesex boarding school, he made his way to Stanford University, having been drawn toward Silicon Valley early on. “That idea that you could get rich really quickly off of starting a start-up didn’t really exist in Massachusetts, on the East Coast, during that time,” Systrom says.

It certainly did on the West Coast, where he entered Stanford’s class of 2006 and majored in management science and engineering. After completing an internship at the company that would become Twitter, he would work for fewer than three years at Google and then for a little more than a year at a small travel-tip site called Nextstop. Systrom would then strike out on his own with a start-up called Burbn, the first incarnation of what would become Instagram. The game-play location-based service was named, in whimsical Silicon Valley fashion, after his interest in fine whiskeys and bourbons.

The Brazilian-born Krieger had been on an even more traditional techie path, moving to a job as an engineer and user-experience designer at the hot social-media platform Meebo in San Francisco after also graduating from Stanford. Krieger, who had come to the U.S. in 2004 and initially wanted to be a journalist, had majored in “symbolic systems,” an unusual combination of computing and cognitive science, which had also been the major of Yahoo C.E.O. Marissa Mayer and LinkedIn’s co-founder Reid Hoffman.

Krieger, who has become the invisible man of the Instagram story, was, in many ways, its soul, according to Systrom, especially its programming one.

The origin story of Systrom and Krieger’s partnership is almost a parody of a Silicon Valley founder meet-cute. Although the two had known each other at Stanford, it was much later when a friendship would click, after the pair kept encountering each other at the same San Francisco coffeehouses. Krieger recalls, “I’d see Kevin and we’d trade tips, and I’d be like, ‘Hey, have you tried this?’—new geeky stuff basically. I think we had this understanding that we were both interested in working on things that were beyond what we were just getting to do by ourselves.”

Systrom had been struggling to launch Burbn, and on one of those caffeinated days in 2010, he approached Krieger and said, “Hey, this is going to be a real thing—are you interested in being my co-founder?” Krieger was immediately interested. “I had an instant image in my head of: I’m working in San Francisco,” he remembers. “I’m working on this thing I love and it’s just the two of us.”

The effort was not without funding, having attracted half a million dollars in investments—$250,000 from the prominent Silicon Valley V.C. firm Andreessen Horowitz and the other half from Steve Anderson, of Baseline Ventures. Still, Burbn was fraught from the start, mostly because it didn’t seem sufficiently different from the scores of other popular and established location-based check-in services—such as the then red-hot Foursquare—which allow you to share the places you visit and recommend them to your friends. Even Burbn’s motto was decidedly squishy: “A new way to communicate and share in the real world.”

To make things even worse, Nextstop—the travel site where Systrom had worked earlier—would soon be sold to Facebook, where Systrom had also been close to working years before. “I was like, Great, I missed the Twitter boat. I missed the Facebook boat,” he says.

Peaks and Valleys

As often happens at start-ups, as soon as Krieger signed on, Systrom told him he wanted to begin afresh with Burbn and focus on a new idea. In Silicon Valley start-up terms, this is called a “pivot,” which is usually a polite way of saying you’ve screwed up and are starting over.

So, the pair began to ruthlessly re-assess Burbn, eventually deciding to create a separate service under the tongue-in-cheek rubric of Codename. Crucially, they dumped slow-moving Web-site coding in favor of an app-only design, thereby throwing their lot in with the Apple iPhone 4, which had just been launched in June 2010.

But their real breakthrough was conceptual: “Instead of doing a check-in that had an optional photo, we thought, Why don’t we do a photo that has an optional check-in?” says Systrom.

It was the sort of eureka moment that made perfect sense because the solution had been there all along: photography had been woven through Systrom’s life, dating back to his time as the president of the photography club at Middlesex. “I was naturally inclined to take pictures, because it was much more about tweaking variables than it was necessarily creating something with your hands,” says Systrom, who in prep school had used a small Nikon S.L.R. camera to take all kinds of arty shots, from reflections in car windows to shadows in Chinatown.

At Stanford, Systrom opted to go abroad to Florence, Italy, for the winter term of his junior year, where he focused on photography. A teacher there persuaded him to switch from his Nikon to a plastic Holga that took square photos, a choice that would be echoed later at Instagram. Florence also marked Systrom’s introduction to using chemicals in the developing process, such as selenium toning, which can give photos a distinct purple hue.

All this would ultimately be incorporated into the new app that Systrom and Krieger were busily sketching out by hand in notebooks in the summer of 2010. During the exhausting push, Systrom took a cheap vacation to a hippie artists’ village called Todos Santos, in Baja California Sur, Mexico, with his girlfriend, Nicole.

On a beach walk one day, Nicole told him she would be reluctant to use the app he was working on because her pictures would never be as good as the ones a mutual friend took. “I said, ‘Well, you know what he does to those photos, right?’ She’s like, ‘No, he just takes good photos.’ I’m like, ‘No, no, he puts them through filter apps.’ She’s like, ‘Well, you guys should probably have filters too, right, then?’ I was like, ‘Huh.’ ”

“Like,” indeed.

Systrom went back to his hotel room and scoured the Internet, trying to figure out how to make a filter. That day, he created the first, which he called X-Pro II, after the “cross-processing where you take the wrong chemicals for the wrong film and you put them together.” He and Nicole started taking pictures using the filter and posted the first Instagram photo in this unusual style of a little Mexican dog lying next to Nicole’s foot. Once they had the filters, they aimed to launch the new service in just eight weeks.

Excited, Systrom and Krieger shared their new plans with their backers. Andreessen Horowitz had no objection, nor did Baseline’s Anderson, who was soon working with them closely on the shift. “I remember thinking, Finally,” says Anderson, who had been frustrated watching Systrom’s difficulties in finding the right recipe for success.

When it came to naming the new service, Systrom and Krieger agreed that “instant” was the key word. After trying hundreds of possible mashups, they settled on “telegram” as the second component.

With the beta version readied, Systrom and Krieger introduced the app to tech luminaries and key media outlets, mining connections from Stanford and their previous jobs in the Valley. Due in no small part to the combination of Systrom’s infectious enthusiasm and Krieger’s charm, the feedback was encouraging, especially when important figures such as Twitter’s Jack Dorsey got interested. Systrom, who had interned at Twitter’s precursor, Odeo, when he was in college (and sat right next to Dorsey at the office all summer), met with Dorsey to show him Instagram. Dorsey was an instant fan.

“From the start, Instagram was a simple application and a joy to use,” Dorsey remembers. “I was blown away by how much detail they put into the experience. It reminded me about how much Kevin talked about photos [when he worked at Odeo]. There was an obvious obsession there, but it had never been put into practice until then.”

Instagram launched on October 6, 2010, with users sharing on both Twitter and Facebook, among others. On that first day, the app had 25,000 users, and it grew exponentially from there.

Early on, there was a San Francisco Giants playoff game taking place at AT&T Park, near the company’s offices. As Systrom recalls, this led to another aha moment: “We were hearing the roars of home runs, not feeling like we were actually there,” he recalls. “We did an ad hoc [search] within the database to see if anyone was using Instagram in the area, and there were 140 photos in the last two hours taken in the stadium, so we could see the game [through the app]. . . . And that was the moment we realized Instagram could be far more than photo sharing.”

Photo Ops

The media and general public alike were almost instantaneously captivated by Instagram, but it wasn’t long before Systrom and Krieger confronted their first unexpected setback.

In 2010, around the time Andreessen Horowitz made its $250,000 investment in Burbn, the firm had also put money into PicPlz, a photo service co-founded by longtime entrepreneur Dalton Caldwell. Though PicPlz was aimed at the growing Google Android mobile eco-system, and the V.C. firm was supportive of Systrom and Krieger’s pivot, the investors felt they were facing an “ethical issue,” as Horowitz later put it, and thus duty-bound to honor their relationship with PicPlz, to which Instagram was now, unexpectedly, a competitor—and so, a month after Instagram’s launch, Andreessen Horowitz announced it was making an additional investment, of $5 million, in PicPlz, forgoing any further investment in Instagram. (The firm would make $78 million on the Facebook sale, thanks to its initial stake in Burbn—a roughly 31,000 percent return.) Systrom, who had been aware of the conflict, learned about the deal by reading it in The New York Times and was devastated. “Instagram was clearly taking off and we just wanted a fair shake,” he says. “Andreessen Horowitz was a big name … and it was like, It sucks to get turned away.”

Ben Horowitz, who had been through his share of investment and start-up disasters, says, “We should have told [Systrom] the second the decision was made.” Indeed, Systrom felt ambushed at the time. “I chalk it up to a moment in time where we were really excited about the momentum we had and we just didn’t quite understand the dynamics,” he says.

There was still plenty of interest from other investors, though, and Systrom quickly zeroed in on one venture capitalist he thought would bring the most to the situation, including star power: Matt Cohler, of Benchmark Capital. The 36-year-old Cohler is a demi-god to entrepreneurs, with a résumé that includes an early stint as an exec at LinkedIn and then a spot as one of the first five employees hired at Facebook. He left his job there running product management in 2008 to become a venture capitalist.

“It was very clear [Instagram] was striking a chord and fulfilling an unmet need,” says Cohler. “This was the first app I had seen for smartphones that was built native for this platform. . . . It was a programmable remote for life.”

By February of 2011, Benchmark was leading a $7 million Series A round of funding, which valued Instagram at $25 million and which also included investments from Dorsey, angel investor Chris Sacca, and another former Facebook tech star, Adam D’Angelo, who just happened to have been Mark Zuckerberg’s roommate at Exeter, and was then running his own start-up, a question-and-answer Web site called Quora.

At a party just a month later, at a retro cocktail bar called Bloodhound in San Francisco, to celebrate millions more users, Krieger toasted Cohler and the group.

“To the good old days,” said Krieger.

“Mike,” replied Cohler, who was the grand old man of the group at 33 years old, “these are the good old days.”

Deal Breaker

I ndeed, with fewer than a dozen employees, Instagram found it nearly impossible to keep up with its geometric growth in users. While Krieger manned the tech operations, Systrom focused on product improvements and fielding interest from big companies looking to buy Instagram, still less than a year old. Chief among the suitors were Dorsey, at Twitter, and Zuckerberg, at Facebook.

“Kevin would call me and I would call him,” Zuckerberg says of his relationship with Systrom during the early days of Instagram. The two had been casual acquaintances ever since meeting at various gatherings at Stanford while Systrom was a student. (Zuckerberg had even tried to get Systrom to drop out to work at Facebook.) After Instagram’s launch, Zuckerberg had Systrom over to his house in Palo Alto for dinner several times to talk about what he called “philosophy.”

It wasn’t just a matter of selfless mentorship and theoretical discourse, though; Zuckerberg had to pay attention to the rising tide of Instagram, especially since photo uploading had been a key element of Facebook’s own initial surge in popularity.

“They got a lot of traffic from Facebook,” Zuckerberg says. “And it occurred to me we could be one company.” Presumably, it also occurred to him that the then little Instagram could pose a very real threat to Facebook. It was not an idle worry: Instagram was hip, elegant, fun, and “mobile-first,” and moving to mobile was a burgeoning problem for the largely desktop-bound Facebook.

Most of all, Instagram represented the constant fear that even the greatest of Internet giants fret about daily: in Silicon Valley, the young can sometimes eat the old, instead of the other way around.

Meanwhile, interest from Twitter waned while Jack Dorsey was distanced from the company for a time, due to his removal from the leadership infrastructure. When he returned as executive chairman, in March of 2011, Dorsey resumed his advances with new gusto, trying to convince Systrom that the social-media company would be his best partner going forward.

At the same time, Systrom got a call from another young and aggressive venture capitalist, Roelof Botha, of Sequoia Capital, an investor in Tumblr and a number of other trending start-ups in the social space. He had been watching Instagram’s growth carefully and reached out to Systrom in early 2012, impressed by its “stickiness.”

“A lot of hot start-ups were losing users as quickly as they get them, like people who get on a bus and then get off in the back,” says Botha. “But they retained their users.” Almost immediately Botha committed to $50 million in new funding for Instagram.

Systrom was soon drowning in choices. With Instagram as the start-up du jour, he was invited to the tony conference run by the New York investment bank Allen & Co. in Arizona, the younger offshoot of the hoary Sun Valley power meet-up. Also in attendance: Jack Dorsey.

After talking a while in front of a campfire over drinks one night, Dorsey and Twitter’s then chief financial officer, Ali Rowghani, proposed to Systrom what they considered a formal offer to buy Instagram. The price was in the mid-$500-million range, a combination of restricted and common stock—but no cash.

While Dorsey and Rowghani recall handing Systrom an actual term sheet, Systrom insists they did not, instigating a he-said-he-said that had serious and unpleasant consequences later. Whatever happened around the fire, Systrom stayed in touch with Twitter until he eventually called Dick Costolo, Twitter’s C.E.O., on Wednesday, April 4, to tell him Instagram was going to take the huge Sequoia investment and remain an independent company.

Systrom also contacted Zuckerberg to let him know about his decision. But, unlike Twitter, Zuckerberg wouldn’t take no for an answer and texted Systrom the next day, asking to talk in greater detail about his interest. “A gesture does not equal an offer, because every tech company is always talking to every other,” Zuckerberg says of his persistence. “So, I wanted to be very clear that we were very serious.”

Zuckerberg had the power at Facebook to make quick and dramatic moves like this. He invited Systrom over to his home in Palo Alto on Friday, two days after Instagram had spurned Twitter, for a series of long and detailed talks about where the two men could take Instagram with Facebook’s massive firepower.

“This never had the feeling of negotiation, because we kind of wanted to work together,” Zuckerberg says. He wanted it very much, events would prove, and the discussions that Friday quickly led to an offer that was essentially double what Twitter had floated and venture capitalists had valued the company at. More enticing still, Zuckerberg’s offer included a giant, $300 million dollop of cash.

Systrom was overwhelmed by Zuckerberg’s massive offer and intensity, which blurred his focus on keeping Instagram independent. “I’m not sure what changed my mind, but he presented an entire plan of action, and it went from a $500 million valuation from Sequoia to a $1 billion [one from Facebook],” says Systrom. “Obviously, the equation was completely different.” (The final value of the offer, after a drop in Facebook’s stock, was $736.5 million.)

What probably clinched the sale was one of the key promises Zuckerberg made to Systrom: to allow Instagram to operate relatively independently within Facebook, unlike a lot of other “acq-hires” the company had made and then proceeded to shut down and integrate.

“Most of the other things we bought were talent acquisitions, but in this case we wanted to keep what it was and build that out,” says Zuckerberg.

Systrom downplays the idea that this courtship was in any way remarkable. “I think everyone thinks that the acquisition was made in a dark room with Trent Reznor music playing. Do you know what I mean? Like there was some dramatic thing,” he says, referencing a scene from The Social Network. “And it turns out that some of the biggest decisions get made relatively quickly, without much fanfare.”

Well, a little. After leaving Zuckerberg’s, Systrom called Krieger, who had to blow off his sister, visiting San Francisco from New York, to decide on Instagram’s next steps. After he arrived in Palo Alto, the pair sat on the Caltrain platform and talked about what a deal could mean.

Eventually, as they were driving back to San Francisco, Systrom told Krieger, quite simply, “I really like Mark, and I really like his company. And I really like what Facebook is trying to achieve.” The pair decided to sell right there and then. The entire negotiation would last from Good Friday to Easter Sunday.

Saturday, Systrom was back at Zuckerberg’s to formalize the negotiations and come to an official acquisition agreement, which they would both sign. Their back-and-forth was interrupted by a television-watching party for Game of Thrones that Zuckerberg, an avid fan, was throwing. Systrom spent much of the time outside in the yard, on the phone to the lawyers. “I didn’t watch the show,” he says. Rather, he spoke to his investors to inform them of the decision and get a sign-off. “I sat back and thought, What just happened?,” Baseline’s Anderson recalls. “Holy shit—what just happened?”

That was the same question Dorsey and Costolo were asking, for very different reasons, when, on Monday, April 9, the news was publicly announced, without a heads-up from Systrom or an opportunity to mount a counter-offer. “People can do whatever they want to do with their company,” Costolo says now. “I don’t think anybody has an obligation. I don’t have any moral stance—that’s up to him and his shareholders.”

Dorsey says the news was harder for him to take, as he felt he had developed a bond with the younger entrepreneur. “I found out about the deal when I got to work and one of my employees told me about it, after reading it online I got a notice later that day since I was an investor,” he says. “So I was heartbroken, since I did not hear from Kevin at all. We exchanged e-mails once or twice, and I have seen him at parties. But we have not really talked at all since then, and that’s sad.” Dorsey’s last Instagram shot perhaps said the proverbial thousand words about it all: a picture of an empty Muni bus.

There would be more clashes with Twitter, including a regulatory hearing held by the California Corporations Department over the level of seriousness of the Twitter offer—hinging on the Arizona campfire moment. But, despite the brief drama that ensued, the deal was done and Instagram was Facebook’s prize.

And while Twitter may have been irked, others were thrilled. Systrom closed the funding deal with Sequoia before Instagram was officially absorbed into Facebook, thereby giving the firm an instant windfall. “I have to give Kevin a lot of credit for keeping his word,” says Botha of a move to honor a handshake agreement that cost the young entrepreneur a small fortune.

Out of Service

Late that summer the small Instagram team headed south to Facebook’s headquarters, in Menlo Park—30-some employees now ensconced in a small section of an enormous new campus.

Just weeks before, though, the smoldering controversy with Twitter had flared up again, when Twitter turned off the “follower” feature it had extended to Instagram—a move that, to many, smacked of retaliation for the spurned acquisition deal. “We look at them as part of Facebook, as a single organization,” says Costolo. “I don’t think it makes a lot of sense to tease them apart.”

Soon after their move to Menlo Park, Instagram parried back by pulling its support for Twitter card technology. In simple terms, this feature keeps the photos of users inside the Instagram network, instead of offering good versions of those photos inside Twitter’s stream. No surprise: Twitter launched its own filter feature soon after.

But another, larger, and more serious setback came less than a month later, when Instagram introduced new terms of service, prepared by a Facebook lawyer, which quietly allowed the company to access users’ photos for advertising purposes—without seeking permission or notifying them. Headlines such as instagram can now sell your photos for ads underscored the outrage of users—not to mention its celebrity following—who threatened to abandon the photo app over the change. (Instagram’s user numbers actually grew during this period.) Systrom quickly backtracked by removing the offending clause, but the damage was done—especially given Facebook’s reputation for intruding on the privacy of its users.

“The problem is actually more that we did it so quickly, without all the right senior people looking at it and going, ‘Hey, why are we including this clause on advertising if we’re not doing advertising yet?,’ ” Systrom says. “And that’s the question I should’ve asked, and I made that mistake, and that’s my fault.”

Systrom says he treated the controversy as a learning experience, telling his team to consider Instagram a small country and to imagine how people would feel if someone had suddenly changed all the road signs to a different color. Since then, things have been much smoother, with the active user base growing by more than 1,000 percent since the acquisition, for a total of 100 million active users after only two and a half years on the market. That compares, interestingly, to the 200-million-user mark that Twitter reached at the end of last year, which was achieved over a six-year timespan.

But who’s counting? Well, everyone in Silicon Valley always is, and some of them think with growth like this Systrom and Krieger should not have sold Instagram quite so quickly. For Systrom, such talk is pointless. “Hindsight is 20/20,” he says, quite aware that Silicon Valley is littered with stories of hot start-ups that had spurned big acquisition offers only to “blow up or go sideways” soon after. In other words, for every Instagram, there are digital graveyards full of Friendsters.

With Facebook, which has just given Systrom a business partner to start figuring out how to make some money from the service, he believes the possibilities are endless, and very long-term. “It’s wrong not to be thankful for what’s happened,” he says.

And yet, even after what is clearly one of Silicon Valley’s best rags-to-riches stories, Systrom has declined to crack open and drink the best whiskey he owns—a 100-year-old bottle of Jim Beam—to celebrate his epic win. “If you open it, then you’ve opened it,” he says. “I’m still waiting for the right occasion.”